The largest banks in the United States face a serious political problem.
There has been an outbreak of clear thinking among officials and
politicians who increasingly agree that too-big-to-fail is not a good
arrangement for the financial sector.

Six banks face the prospect of meaningful constraints on their size:
JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs
and Morgan Stanley. They are fighting back with lobbying dollars in the
usual fashion – but in the last electoral cycle they went heavily for
Mitt Romney (not elected) and against Elizabeth Warren and Sherrod Brown
for the Senate (both elected), so this element of their strategy is
hardly prospering.

What the megabanks really need are some
arguments that make sense. There are three positions that attract them:
the Old Wall Street View, the New View and the New New View. But none of
these holds water; the intellectual case for global megabanks at their
current scale is crumbling.

Most encouraging is the emergence of a real discussion over the implicit taxpayer subsidy given to the largest banks. See also this editorial in Bloomberg from a few weeks ago:

On television, in interviews and in
meetings with investors, executives of the biggest U.S. banks --
notably JPMorgan Chase & Co. Chief Executive Jamie Dimon -- make
the case that size is a competitive advantage. It helps them
lower costs and vie for customers on an international scale.
Limiting it, they warn, would impair profitability and weaken
the country’s position in global finance.

So what if we told you that, by our calculations, the
largest U.S. banks aren’t really profitable at all? What if the
billions of dollars they allegedly earn for their shareholders
were almost entirely a gift from U.S. taxpayers?

... The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

So much for the theory that the big banks need to pay big bonuses so they can attract that top financial talent on which their success depends. Their success seems to depend on a much simpler recipe.

This paper also offers some interesting analysis on different practical steps that might be taken to end this ridiculous situation.

Search This Blog

This blogexplores the potential for the transformation of economics and finance through the inspiration of physics and the other natural sciences. If traditional economics has emphasized self-regulation and market equilibrium, the new perspective emphasizes the myriad positive feed backs that often drive markets away from equilibrium and cause tumultuous crashes and other crises. Read more about the idea.

Who am I?

Physicist and science writer. I was formerly an editor with the international science journal Nature and also the magazine New Scientist. I am the author of three earlier books, and have written extensively for publications including Nature, Science, the New York Times, Wired and the Harvard Business Review. I currently write monthly columns for Nature Physics and for Bloomberg Views.